Trump’s Mexico tariff threat could jeopardize USMCA, damage economy

Right before the latest tariffs go into effect against China, President Donald Trump announced he plans to impose a new round of tariffs against another country.

In a surprise announcement, President Trump said he would impose 5% tariffs on Mexican goods beginning June 10 as a way to pressure the country to stop migrants from crossing the border illegally.

According to a statement from the White House, the tariffs would quickly increase, reaching 25% on Oct. 1, if Mexico does not take action “to dramatically reduce or eliminate the number of illegal aliens crossing its territory into the United States.” The tariffs would remain at 25% until Mexico takes action.

As for what would constitute effective action by Mexico, that would “be determined in our sole discretion and judgment,” reads the White House statement.

In a letter addressed to President Trump, Mexican President Andrés Manuel López Obrador said he did not want confrontation. He added that Mexican officials would visit Washington immediately to work out an agreement.

“President Trump: Social problems cannot be resolved with taxes or coercive measures,” the Mexican President wrote.

Jésus Seade, Mexico’s undersecretary for foreign relations and chief trade negotiator, said the country wouldn’t retaliate before discussing the situation with the American policymakers. But he noted, “If it happens, we must respond energetically.”

Fate of USMCA

The new tariff threat comes at a peculiar time, with the administration ramping up its push for approval of the new United States-Mexico-Canada Agreement (USMCA) that will replace NAFTA.

The same day that the President revealed his intention to impose tariffs on Mexico, US Trade Representative Robert Lighthizer sent a letter to congressional leaders to formally start the process of ratifying the new trilateral trade deal. That same day also saw Vice-President Mike Pence visit with Canadian Prime Minister Justin Trudeau where he pledged to win congressional approval for USMCA this summer.

The announcement also comes not long after President Trump lifted tariffs on Canadian and Mexican steel and aluminum imports. Policymakers from all three countries said those tariffs were a hindrance to getting the deal approved.

USMCA, which was signed by leaders of the three countries in November, still needs to be ratified by each respective government.

The deal was projected to have a relatively easy passage in Mexico after the elimination of the steel and aluminum tariffs. But the new tariff threat undoubtedly changes that situation and many anticipate the matter could put the fate of the new North American trade deal at risk.

“There goes USMCA!” Rufus Yerxa, president of the National Foreign Trade Council, told Bloomberg. “What trading partner is ever going to trust this administration to honor deals?”

However, Mike Mulvaney, the acting White House chief of staff, told reporters that the tariffs wouldn’t affect the trade deal.

“The two are absolutely not linked,” said Mulvaney. “These are not tariffs as part of a trade dispute. These are tariffs as part of an immigration problem.”

Despite Mulvaney’s comments, many have remarked it is unrealistic to think the tariffs won’t have some impact on the trade deal, and that imposing duties is not the appropriate way to address immigration issues. To impose the tariffs, President Trump said he is invoking authorities under the International Emergency Economic Powers Act.

“Trade policy and border security are separate issues. This is a misuse of presidential tariff authority and counter to congressional intent,” said Senate Finance Committee Chairman Chuck Grassley (R-Iowa), adding the tariffs would “seriously jeopardize passage of USMCA.”

If the President follows through on his tariff threat, it would be a violation of NAFTA as well as World Trade Organization commitments.

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Impact on the US economy

If imposed, new tariffs will certainly have repercussions for the economies on both sides of the southern border.

Mexico was the second-largest importer of goods into the United States in 2018, and its third-largest goods trading partner. According to the Office of the United States Trade Representative (USTR), the US imported $346.5 billion worth of goods from Mexico in 2018, an increase of 10.3% from 2017 and up by a massive 60.5% from 2008. Last year, Mexican products accounted for 13.6% of the annual total of US imports.

A 5% tariff on $346.5 billion in goods would hit company profits by about $17 billion, while the full 25% would have an $87 billion impact. American consumers will also notice the implications of tariff increases against Mexican goods more than they have with tariffs on China since the price increases for food items are more noticeable.

In 2018, Mexico was the US’s biggest supplier of agricultural imports, totaling $26 billion. The leading categories were fresh fruit and vegetables, wine and beer, snack foods, and processed fruits and vegetables.

The tariffs would also have significant consequences for the American auto sector. Last year, the US imported $52.6 billion in vehicles and $59.4 billion worth of auto parts from Mexico.

In fact, every American auto factory relies on parts from Mexico to build vehicles.

If tariffs reach 25%, vehicle costs in the US will rise by approximately 3.6%. That increase would lead to a drop in consumer demand, which could cut auto production in the US by upwards of 3 million vehicles per year, an 18% decline from current levels.

That scenario would be the greatest upset to the US auto sector since the Great Recession that almost led to the industry’s collapse.

The US Chamber of Commerce estimates that 6 million American jobs are reliant on trade with Mexico.

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